Contents
- Overview of short term debt funds
- Benefits of short term debt funds
- Stable returns
- Maintaining a balanced portfolio
- Meeting financial objectives
- The risk involved in the case of short term debt funds
- Credit risk
- Fluctuating Interest rate
- The risk from low maturity period
- Inflation risk
- Liquidity risk
- Top 10 short term debt funds
Overview of short term debt funds
A short term debt fund is a type of mutual funds that invests a certain amount for a span of 1-3 years (sometimes 4). There is a comparison between fixed deposits and short term debt funds. But which is better: debt funds or fixed deposits? On the basis of return, taxation and, risk short term debt fund fares better.
- In the case of returns, short term debt funds attract an annual return of more than 10%. But in the case of FDs, it is 7% maximum. Know what are the best debt funds to invest in 2019.
- There is no penalty if you redeem your amount on your pre-determined date (which is before the maturity date). At the same time, in the case of FD, if you redeem your amount before maturity date then it attracts 1% penalty on it.
- Short-term debt funds don’t face any exceptionally high-interest rate risks, though some of them can be exposed to credit risks.
Benefits of short term debt funds
Stable returns
These funds come under the category of liquid funds, floating rate funds. corporate bond funds & ultra short term debt funds. The basis of classification is the duration of the funds. This is applicable in the case of Government Securities, Treasury Bills, Corporate Bonds and Money Market Instruments, etc. which comes under fixed income securities and debt instruments. Learn how liquid funds are taxed.
People prefer debt funds over equity funds as they offer fixed returns and are not affected by the market conditions. Moreover, these funds have a pre-determined date of maturity along with them.
Maintaining a balanced portfolio
In the case of short term debt funds, these scores better than the equity funds. Learn how you to evaluate the best equity funds. It is because they are risk-averted due to capital erosion during the short-term of below 3 years. Hence, it is not advised to consider equity funds investments for liquidity or as a means for achieving short-term financial goals is not a recommendable option.
Meeting financial objectives
Short term debt funds have a special feature of achieving financial objectives in a period of 1-3 years. As the after tax-returns are higher than the other non-equity counterparts of the same duration. Moreover, the short term debt funds could be opposite to its name i.e. these can be considered for long-term investments as well.
In addition to this, if these funds are held for a period of more than 3 years then also the returns are much higher than in the case of FDs. The tax charged on the FDs is on the basis of the income tax slab that is applicable to your income bracket. But in the case of short term mutual funds, it depends on the holding period.
Taxation on gains
- If the redemption is within 3 years, then it is the short term capital gain (STCG) and it adds to your income during tax calculation. Learn how tax is charged on mutual funds.
- Whereas, if the sales are after a period of 3 years, then it comes under Long term capital gain (LTCG) and are taxable at 20% with indexation and 10% without indexation. Learn what are the tax benefits of investing in mutual funds.
Must read on tax planning: types & objectives in mutual funds.
The risk involved in the case of short term debt funds
Short term debt funds are considered devoid of risks, but it should be kept in mind that they completely aren’t free from risks. You should be aware of all the possible risk before opting for these funds. Some of these risks are as follows:
Credit risk
In case you are unable to meet the payments, there will be credit risk associated with it. The ratings awarded to each short term debt fund is by CRISIL, which indicate their risk exposure & quality of portfolio investment. Let’s say a fund gets a high rating by the CRISIL, then this would mean low risk.
Fluctuating Interest rate
According to the prevailing interest rate, the return on the short term debt fund is decided. If the interest rate is high, then it would mean low returns and vice versa.
The interest rate impact in the same case as of mutual funds. If the interest rate prevailing is high, then it would reduce the price of the mutual fund and so on.
The risk from low maturity period
If the maturity period is less, then this would mean low risk as the impact of change in interest rate is low.
Inflation risk
Inflation affects the short term mutual funds in negative ways. In the case of a higher inflation rate, the value of debt mutual funds is lowered.
Liquidity risk
According to your needs, you need to select the type of funds. There could be varied period to opt and exit a type of fund.
Top 10 short term debt funds
| Fund name | Risk | CRISIL |
|---|---|---|
| HDFC short term debt fund | Moderately low | Rank 1 |
| IDFC bond fund | Moderate | Rank 1 |
| L&T short term bond fund | Moderately low | Rank 1 |
| Kotak corporate bond fund | Moderately low | Rank 1 |
| HDFC Short term debt fund (growth) | Moderate | Rank 1 |
| HDFC short debt fund (direct-growth) | Moderately low | Rank 1 |
| IDFC bond fund (direct-growth) | Moderate | Rank 1 |
| L&T short term bond fund | Moderately low | Rank 1 |
| IDFC bond fund (direct-growth) | Moderately low | Rank 2 |
| Kotak Dynamic bond fund (growth) | Moderately low | Rank 2 |
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